Introduction.docx

Introduction

What is a Minimum Wage? Wages, as defined by the International Labor Organization (ILO), are the earnings payable by an employer to an employed person for work done or to be done, or for services rendered or to be rendered. They are usually expressed in monetary terms and are generally fixed either by mutual agreement or by national laws or regulations.5 Figure 1: Wage Structure The minimum wage, which places a legal floor on the rate that employers must pay to workers, is usually the central component of several that comprise the wage structure. Other factors that contribute to the wage level include: premiums for skills and experiences, or legislative payments such as social security, severance pay or overtime pay. Wage Minimum Wage Authority Collective Bargaining =+ Other Factors The minimum wage rate, and the way it is determined, varies across countries and largely depends on their respective policy objectives. Commonly, a minimum wage is introduced to "secure workers a reasonable standard of life as this is understood in their time and country”6. This form of minimum wage is usually referred to as a “safety net”. Another policy reason for setting a minimum wage can be to ensure that income and profit are fairly distributed to workers (see Box 1 for a brief explanation on the two common forms of minimum wages).

The argument behind this type of wage is that it provides all workers protection against wages that may fall below a minimum acceptance level, as determined by the state. It is important to point out that different countries employ different methods for calculating a ‘minimum acceptance level’, and to date no clear consensus on how to establish an international norm for this calculation has been reached. Income and profit distribution This kind of minimum wage aims to provide workers with a fair income and profit distribution, and is often referred to as an instrument of macroeconomic policy that can “alter the general level and structure of wages in line with broad national economic stabilization, growth and

income distribution”. The reasoning behind this kind of minimum wage stem from the opinion that wages should reflect economic rents, i.e. increases in productivity and profit taking. Minimum wage with this aim is not calculated from a pre-determined social protection formula. Instead, wage committees and collective bargaining are generally used to establish the wage level, often with the public sector playing an important role in the process. Source: Brooker Group Consortium (1999). Final Report Thailand Labor Policy Review, Thailand. 2. Why Set a Minimum Wage? This section considers the question: why is a minimum wage necessary? Wages can have an influential weight in the efforts to reduce poverty, raise living standards and increase labor productivity. Historically, minimum wages were created to ensure that workers get at least enough pay for subsistence, an objective that is still rightfully the driving reason. The underlying purpose of a minimum wage is to guarantee that workers receive adequate wages to cover their (and, in some cases, their dependents’) basic needs: food, clothing, housing, health and education. In some cases, the notion of a basic living wage encompasses not only the basic necessities of life, but also the “preservation of the efficiency of the worker”, and includes some amounts of income for recreation.

Provide Wage Protection Another reason for instituting a minimum wage is to provide income security for vulnerable workers. A minimum wage is set in order to insulate low income workers from deteriorating real wages relative to the average wage. In this sense, the minimum wage is used as a mechanism to narrow (or avoid widening) the income gap.

Create Incentive to Work In some countries, like New Zealand (New Zealand Employers’ Federation, 1999), a minimum wage is established to induce people to work. The minimum wage aims to attract people into the labor force by raising the opportunity costs for not working. This rationale is less relevant for

developing countries, especially for countries that lack a safety net for the unemployed. Most people in developing countries simply cannot afford to not work.

Obtain Fair Share of Economic Growth and Prosperity A fourth reason for setting a wage floor is to ensure that workers receive a fair share of their contributions to economic growth and prosperity. The principal objective is to make sure that workers are not exploited, but rather rewarded for their labor. A minimum wage that incorporates a premium for economic growth may also motivate workers to increase productivity. Thailand, for instance, established a minimum wage with this motive in mind, among other reasons.

What and Why a Minimum Wage At present, minimum wages in Malaysia are sectoral. For setting the minimum wage, the following key determinants are used:54 Fixed Components: This includes the basic wage, annual increment, and contractual bonus (where applicable). Fixed wage components should reflect the value of the job and annual increment paid in recognition of the employee’s length of service and experience. Variable Components: This includes wage increase for the year based on productivity and profit sharing formula. The variable components of wages could be determined in relation to the productivity and performance of the individual, work group or organization. The National Labor Advisory Council (NLAC) has defined a set of guidelines on reforming the wage system. The purposes of these minimum wage guidelines are to:55 Establish a closer link between wages and productivity so as to enhance competitiveness and promote employment stability;

Enable employers to develop a wider and systematic approach towards improving productivity and wages through the active involvement and cooperation of their employees; and Enable employees to obtain a fair share of the gains that arise from productivity growth and performance improvements thereby promoting equity, social cohesion and enhancing the quality of life as well as developing improved skill-related career paths and increasing job satisfaction. How Minimum Wage is Set The Wages Council Act 1947 states that the government may establish Wages Councils for certain non-unionized sectors of the workforce. These Councils play a role in recommending minimum wage rates to the government for enacting a Wage Regulation Order. Presently, minimum wage rates are set for workers in the catering and hotel sector, and for stevedores, cinema workers, and shop assistants. For sectors not covered by the minimum wage, collective bargaining between the employer and trade union can be used for setting a minimum rate.56 Impacts of Minimum Wage Despite anti-union policies instituted by successive Malaysian governments, overall wages have surpassed productivity growth in recent years. In response, the Malaysian Employers Federation has lobbied for a ceiling on wage increases. Negotiations have begun at the corporate and government levels about the introduction of a more flexible wage system, Singapore-style.

Trade unions are calling for a national minimum wage; however, Malaysia's premier has strongly refused this request, arguing that such a move would hurt national competitiveness57. Some have argued that a national minimum wage would deter foreign investment and trigger mass unemployment. The Malyasian Trade Union Congress (MTUC), an umbrella for private sector labor unions, has threatened to conduct a nationwide strike if their demands are not met. Malaysia’s export-oriented industrialization strategy has made the country dependent on lowcost, labor-intensive foreign–dominated manufacturing for generating exports.

A concern repeated by the Federation of Malaysian Manufacturers (FMM), an employers association, is that a national minimum wage policy could work against unskilled workers. ''A

minimum wage will not reduce poverty but on the contrary can increase poverty rates when lowskilled workers lose their jobs,'' said the FMM in a statement. The FMM stated that such a policy could accelerate the process of substituting lowly skilled workers with those who are more highly skilled since they (lower skilled workers) would become more expensive with a minimum wage. ''It will be more effective and to the best interest of workers and trade unions to focus on programs to upgrade skills,'' suggests the FMM.58 The overall point of the FMM is that minimum wage is negative for competition, and could result in shrinking production over time. Pro: Provides Incentive Through its online publication the Observer, the OECD reports that a minimum wage offers an incentive for unskilled and unemployed workers to find employment. Poverty puts a burden on a national economy, as the government is forced to try and assist those who cannot find work. A minimum wage ensures low-skilled workers that they will be paid a guaranteed minimum and encourages them to find work and provide for themselves. Con: Slows Job Growth Paul R. La Monica points out in the CNN Money article "Behind the Minimum Wage Debate" that a minimum wage law can discourage employers from hiring new employees. The guaranteed minimum wage can represent an expense that a small business may not be able to afford. If that is the case, small businesses will attempt to get more production from existing staff rather than paying minimum wage to new employees. Pro: Offers Job Security During a weak economy, workers with minimum wage jobs benefit because they tend to be at the lower end of the pay scale, according to economist Lisa Scherzer in the SmartMoney article "Winners and Losers of the Minimum Wage Hike." Part-time workers making minimum wage could be given full-time opportunity to help save an employer the cost of hiring and training new employees. Con: Is Applied Inconsistently According to the U.S. Department of Labor Wage and Hour Division, each state has its own laws for minimum wage. The laws can vary greatly, making minimum wage an opportunity for some and a lost opportunity for others. As of June 2010, the state of Alabama had no minimum wage requirement, while the state of Washington had the highest minimum wage at $8.55 per hour. Inconsistent minimum wage laws around the country can keep some workers living below the poverty line while others are able to provide for themselves.

Proponents of Minimum Wage

Many do believe that minimum wage laws achieve these goals. They do ensure that workers on the low end of the pay scale are not underpaid because of their gender or race. They also do ensure that workers are given a fair wage. However, their effect on society as a whole and on those who are not currently employed is questionable. Supporters of minimum wage also believe that a minimum wage stimulates consumption and thus puts more money into the economy by allowing low paid workers to spend more. They also believe that it may increase the work ethic of those who are paid little and thus benefit employers. It also encourages people to join the work force, rather than seek other illegal means of earning money such as selling drugs or prostitution.

Opponents of Minimum Wage

Some people who are opposed to the idea of minimum wage believe that it is not accomplishing the goals it was designed to meet. In several instances, employment has decreased more than the increase in wages and thereby overall earnings are still reduced. Businesses are sometimes forced to hire fewer employees because they must pay minimum wage. Thus, fewer people have a job. Studies also show that very few low-wage workers actually come from families in poverty. Thus, minimum wage is more often imposed on the sixteen-year-old worker with his first job than on people who would otherwise be unemployed.

Other opponents of minimum wage believe that it can cause price inflation as businesses must raise their prices to accommodate the higher wages. They also believe it discourages further education of the poor. The United States currently has laws in place to ensure a minimum wage. Whether or not these laws should remain in place is a matter of debate. There are benefits and downfalls to minimum wage laws and nothing is cut and dry.